http://www.jewishworldreview.com --
TERMINATOR III Greenspan once again went up to Capitol Hill to convince
Congress and the public that he will slay the recession dragon and deliver
prosperity-recovery to all. Unfortunately, stock markets weren't buying. In
fact, they were selling -- hard.

Though the Fed may not believe it, history shows that financial markets are
very good barometers of economic policy. Stock markets, in particular, signal
whether the policies are pro-growth or pro-recession. Right now the market
message is clear -- it's a huge Bronx cheer.

Once again, the estimable Fed chairman mistakenly argued that econometric
models are more important than market messages. In particular, when Sen. Bob.
Bennett (R., Utah) asked him Tuesday about our argument that slumping
commodity indexes signal a deflationary shortage of liquidity, Greenspan
demurred.

He acknowledged that falling raw-material prices signal weak industrial
demand, but he was unwilling to concede any monetary content. Therefore, he
argued, there is plenty of liquidity in the economy, as illustrated by the
rapid growth of the M2 money measure (which includes currency, demand
deposits, money-market funds, and savings accounts).

But M2 is rising because little old ladies in tennis shoes -- along with
everyone else -- are stuffing their cash in money-market funds. That means no
one is taking investment risks by putting their dough to work in productive
businesses or new high-tech ventures -- the stuff that makes for true
economic recovery.

The basic measure of liquidity is the monetary base, made up of bank
reserves and currency, and controlled solely by the Fed through its net
purchases of Treasury securities. Noteworthy is the fact that short-run base
growth has been declining since mid-May. Not coincidentally, both stocks and
commodity indexes have sagged.

Greenspan's responsibility -- whether or not he admits it - is the problem
shortage of liquidity. If the central bank were really stimulative, then
commodity indexes would be rising, not falling. The dollar-exchange rate
would be falling, not rising. Various treasury bond-rate spreads would be
widening, not narrowing (e.g. federal funds vs. two-year Treasury notes).
Tech stocks would be rallying, not sinking. But none of what should be
happening is happening.

The fact that the central bank has been reducing its key policy rate does not
really signal easier money. Instead, the Fed has been following economic
demands lower.

Think of it this way: The federal funds rate has dropped nearly three
percentage points, but the economy's growth rate has plummeted five
percentage points. That's why the federal-funds-rate-targeting approach is
inferior to a market-price-rule approach. Market's reveal more accurate and
timely information about deflation or inflation than M2 or NAIRU or the
Phillips Curve.

Not surprisingly, as Greenspan stubbornly stuck to his old-economy models,
stock markets tanked. Actually, stock markets are tanking globally. The G-7
summiteers in Genoa, Italy, tried to persuade us that all will soon be well
internationally. But Japan hit a 16-year low on Monday, and new numbers from
Germany are flagging a worse European downturn than the EU commissars have
been willing to admit.

Back home, Bush economic advisors Glen Hubbard and Larry Lindsey began to
make a much-needed case Monday for capital-gains tax cuts and faster
business-depreciation allowances to spur corporate investment. But the
political probabilities for another round of tax cuts are presently slim to
none. As we know, leading Democrats like Tom Daschle and Richard Gephardt are
calling for tax increases. Think of it, Herbert Hoover goes Democrat.

But the real obstacle to additional tax cuts is the congressional budget
accounting mania, which has bi-partisan support in favor of maintaining large
budget surpluses during the recession. No self-respecting Keynesian would
sign-on to this economic gobbledygook, much less a supply-side activist. All
budget surpluses should be returned to the economy as personal and business
tax cuts. But it won't happen any time soon.

Supply-siders on Wall Street and Capitol Hill are beginning to mutter
about a marginal slow-growth recovery that is saucer-shaped not v-shaped.
What should be a 5% growth recovery is now being marked down to a 3% or even
less recovery, one that will not do President Bush or Congressional
Republicans any good in next year's mid-term elections.

So the last great hope is indeed Terminator III Greenspan. Right now, the Fed
is the only game in town. Arnold Schwarzeneger would be ready for some bold
outside-the-box move (like a reverse-gainer flip into a two-armed UZI bullet
storm). But will Alan
Greenspan?